Down-trending markets always bring out a couple of buyers – among them the classical dip-buyer, the guy who averages down, and also a type of speculator that possibly has completely avoided participating in the previous bull market: the bargain hunter.
In every cycle, eventually those appear who think that real-life scenarios can be translated 1:1 to the stock market. Bargain hunters believe that a stock which stellar ascent they’ve been watching but thought was “too expensive” and that has now collapsed 50-80% is now a bargain, undervalued.
It appears that ‘retail investors’ are coming back (or new ones out of the woodwork) to buy Tesla stock (TSLA), now that is has declined >70% from its top in late 2021. In fact, amateurs have bought more into TSLA’s down-trend than while it was trending up. Just like a coat that was expensive before Christmas, that has now been marked down and is on sale, is a bargain.
Unfortunately, this is not the case. The price is down, because the large institutional holders that have made their profits have sold or are selling heavily. And they’re selling for a reason – be it because of the future of the company, the macro-environment, or the constellation of the stars. It does not matter.
Whatever anyone’s imagination could conjure up that Tesla under Elon Musk might produce in the future, it has already been priced into TSLA stock in 2019-2021. And now it’s rolling over.
Shares change hands from the few to the many, and there is no supporting firepower anymore to bring the stock up, now or in the next few years. Add to that the troves of trapped buyers at higher prices that are eager to sell at break-even and depress the price more, and you get a feisty mix of suppressive fire.
My research shows that previous bull market leaders have about a 2% chance of leading again in the next cycle. 2% of previous bull market leading stocks, not 2% of stocks, mind you. Bad odds. And even in the unlikely event of TSLA reigniting in the far future again, it will still very likely be dead in the water for a decade or so to come for those who bought recently.
TSLA stock is still touted as a buy by popular investment sites and reputable magazines, and a supportive narrative is given by the investment icon of the last bull, Cathie Wood. Her flagship fund, with TSLA stock among its largest holdings, is down 75 to >80% from its tops.
In his 1925 book How I Trade And Invest In Stocks And Bonds, Wyckoff shares a story about a friend who bought into the declining Union Pacific stock in 1909:
“I recall a friend who, after seeing Union Pacific sell at $219 in August, 1909, thought it very cheap at $185 and much cheaper at $160. That made it a tremendous bargain at $135. He bought all those figures. But at $116, his capital was exhausted and, as they put it in Wall Street, ‘He went out with the tide'”.
In any case, such activity by the ‘retail investor community’ suggests that investor complacency is still high, which classically does not coincide with bottoming markets. It definitely fits in the wider picture I’m getting from looking at the markets.
So long…
